UPDATE 4-Yuan, stocks recover, but Sino-U.S. trade woes dampen mood

* Yuan fixing seen as attempt to stabilise market (Updates with Hong Kong stocks close and yuan’s onshore official closing price)

By Andrew Galbraith and Luoyan Liu

SHANGHAI, July 12 (Reuters) - China’s yuan recovered against the dollar on Thursday, but markets remained jittery amid the worsening Sino-U.S. trade dispute and after the central bank set its weakest guidance for the currency in nearly a year, with stocks also clawing back heavy losses.

The yuan settled at 6.6679 as of 0830 GMT, its domestic close, slightly firmer than Wednesday’s late onshore close of 6.6750, regaining ground after crossing the key 6.7 to the dollar level in the morning session when it touched 6.7051.

Reversing the previous session’s slide, the Shanghai Composite index ended Thursday up 2.2 percent. It lost 1.8 percent on Wednesday. The blue-chip CSI300 index was also up 2.2 percent, following a 1.7 percent drop the day before. Shares in Hong Kong closed 0.6 percent higher.

The fall in the yuan and stocks in recent weeks come as China-U.S. trade relations deteriorated. On Wednesday, Beijing accused Washington of bullying and warned it would hit back after the Trump administration raised the stakes in their trade dispute, threatening 10 percent tariffs on $200 billion of Chinese goods.

“The dominating selling pressure is exhausting now, and we believe the stock market is bottoming out thanks to historically low valuations and ‘a warm breeze’ from policymakers,” including cuts to banks reserve requirements, said Zhang Quan, an analyst with Huaan Securities.

However, the rally in stocks was mostly technical in nature after the heavy sell-off, while sentiment remained depressed, Zhang added.

In the currency market, the People’s Bank of China (PBOC) set its official daily midpoint at 6.6726 per dollar, its weakest since Aug. 18, 2017 and the biggest one-day percentage weakening of the midpoint rate since Jan. 9, 2017.

However, traders said the supply and demand for the greenback were balanced at around the 6.7 per dollar level and investors were holding off testing lows in the yuan for now.

“A weaker yuan could offset some of the negative impact from the trade war. As long as the pace of depreciation of the yuan is under control, the spot yuan rate could fall further,” said a trader at a Chinese bank in Shanghai.

He added that authorities are concerned that the yuan might fall too rapidly over a too short period of time.

Several traders said the official yuan fixing on Thursday was set firmer than market forecasts, a sign they interpreted as an official attempt to prevent the yuan from sinking too fast.

Qi Gao, Asia FX strategist at Scotiabank in Singapore, said the fixing was about 100 pips stronger than the market had expected, suggesting that the PBOC may have incorporated its previously suspended “counter-cyclical factor” in its midpoint calculation.

“It shows the central bank intends to stabilise the market and calm investors,” said Gao, adding that “one-way speculation on the yuan’s depreciation is not in Chinese authorities’ interests.”

Introduced in May 2017 and officially suspended in January, the counter-cyclical factor was designed to curb speculation and volatility in the yuan.

Government bond futures were flat. Chinese 10-year treasury futures for September delivery, the most traded contract were up 0.02 percent at 95.750. (Additional reporting by Winni Zhou; Editing by Sam Holmes and Jacqueline Wong)